PBOC: China to open FX market to foreigners

Added 13th August 2015

Yi Gang, deputy head of China’s central bank, said that qualified foreign institutions will be allowed to enter China’s FX market in order to bridge the gap between the yuan’s onshore and offshore rate.

PBOC: China to open FX market to foreigners

Foreign exchange trading hours will be extended to accommodate exchanges in London and New York, Yi said today at a PBOC press conference set up to address the recent yuan depreciation.

Yi denied reports that the government planned to make the yuan depreciate 10% in order to boost exports.

In an earlier statement, the PBOC said it will maintain a normal fluctuation of the yuan.

“There is no basis for continual devaluation,” added Zhang Xiaohui, another PBOC official. “It will return to the appreciation trajectory as the currency will be strong in the long term.”

The PBOC surprised markets by introducing a new fixed- rate calculation mechanism, in a move toward a more market-based mechanism. The yuan has since devalued more than 3% against the US dollar, raising fears of further depreciation and capital outflow.

The new system will refer to the previous day’s market closing price along with demand and supply conditions to determine the yuan rate for the next day.

The move demonstrates the government’s FX reform initiatives, in line with its push for the yuan’s inclusion in the IMF Special Drawing Rights, and its efforts to stabilise economic growth, HSBC said in a research note.

“If taken by the word, this would mean that the yuan would actually become a floating exchange rate,” added Susan Joho, economist at Julius Baer.

Impact on markets

The consequences of the 3% devaluation will be felt in several areas, according to Vontobel Asset Management.

Emerging markets currencies are expected to weaken further. “We have a substantial underweight stance towards EM assets, being strongly underweight in EM equities and EM local debt while being neutral on hard-currency EM debt,” said Christophe Bernard, chief economist at Vontobel Asset Management, in a research note.

In equities, “sectors exposed to China and commodities such as energy, mining, automotive or luxury goods are likely to remain under pressure as investors (rightly) question the companies’ earnings prospects”.

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